hospTRENDS Volume 2002-1 January 2002
Page 1 hospTRENDS January 2002
ANNOUNCEMENTS
Operating margin has been calculated by dividing net operating income by total PATIENT revenue in previous editions of the hospTRENDS report. However, some readers have indicated that an operating margin based on dividing net operating revenue by total OPERATING revenue would be more useful for comparative purposes. Total OPERATING revenue is total PATIENT revenue plus cost recoveries minus deductions from revenue. While in most industries the difference between these methods of calculating operating margin would be insignificant, that is not the case in the hospital industry, where deductions from revenue are over 40% of total patient revenue. However, since this condition has existed for a long time in the hospital industry, the trend lines from both methods are similar
In this issue of hospTRENDS operating margin is calculated both ways. The previous method is labeled the Gross method, since it is derived from total patient revenue and the new method is called the Net method, since it is derived from a modified net patient revenue.
The primary purpose of this series of reports is to provide information that is useful to the readers. So, please let us know which method is more useful for you. A simple one word response (gross, net, both, or neither) would be sufficient. However, if you are willing to share the reasons for your preference, your comments are always important to us. If there is a clear preference for one method, that method will be used in future editions of this report. If there is no clear consensus, both methods will be utilized in future editions.
PREFACE
Summary financial and utilization data are submitted on a quarterly basis to the Department of Health by hospitals in the state of Washington. Reported data are edited, summarized, and analyzed by Hospital and Patient Data Systems staff. Specific data elements are defined in the Department’s Accounting and Reporting Manual for Hospitals. Reported data are utilized to calculate financial and utilization rates to enhance the description of the financial condition of hospitals in the state. The purpose of this series of reports is to provide all concerned parties with information describing emerging hospital utilization and financial trends.
Instead of focusing on individual quarters, data in this report are aggregated into twelve month periods consisting of four calendar quarters each. This aggregation reduces the impact of seasonal fluctuations that could distort actual trends occurring within the hospital industry.
The period covered by this report includes the last calendar quarter of 2000 and the first three calendar quarters of 2001. It provides a preview of where calendar year 2001 results are headed. However, this preliminary view is subject to change. The quarterly reports submitted by hospitals contain interim data, which have not been subjected to audit review. Future adjustments and/or revisions as a result of both the hospital’s internal accounting system review and the formal procedures of outside auditors may result in changes to previously submitted data. These future revisions will be reflected in the hospital’s year end reports. The year end reports not only reflect audit adjustments, but also provide substantially greater detail, which allows analysis of the information provided in greater depth.
SUMMARY
Annual growth rates for the four quarter period ended September 30, 2001 were 14.3% for total patient services revenue and 20.7% for deductions from revenue. This resulted in an increase of 9.9% in net patient services revenue, which was the biggest jump recorded since the twelve month period ended December 31, 1995. The increase of 9.7% in operating expenses was greater than any posted since the twelve month period ended December 31, 1992.
Net operating income of $143.2 million for the four quarter period ended September 30, 2001 was 19.0% over the corresponding period one year earlier and was 42.4% over the low of $100.6 million recorded for calendar year 2000.
Adjusted discharges advanced by 2.9% to a new high 908,555, resulting from an increase of 3.6% in inpatient discharges offset by a small decrease in outpatient activity as a proportion of total hospital activity.
Days in accounts receivable dropped to 71.8 days in the twelve month period ended September 30, 2001, which was a reduction of 8.5% from the year earlier level and was the lowest level experienced since the twelve month period ended December 31, 1995. For payers other than Medicare and Medicaid, days in accounts receivable dropped to 78.8 days, which was a reduction of 11.5% from the year earlier level and was the lowest level experienced since the twelve month period ended June 30, 1993.
FINANCIAL INDICATORS
Total Patient Service Revenue
Total patient service revenue, which is the sum of billed charges for all hospital services, advanced by $1.5 billion to $12.3 billion, which was an increase of 14.3%. This was less than any annual percentage increase in total patient services revenue since the four quarter period ended September 30, 1999. For the second time since 1979 inpatient revenue grew more rapidly (14.9%) than outpatient revenue (13.6%). Medicare revenue grew by 17.0%, which was the largest increase recorded since the four quarter period ended December 31, 1982. Although the increase of 16.5% in Medicaid revenue exceeded the rate of increase in total patient services revenue, it was still the smallest percentage increase in Medicaid revenue since the four quarter period ended December 31, 1999.
Deductions from Revenue
For the twelve month period ended September 30, 2001 total deductions from revenue reached $5.3 billion. Contractual adjustments were up 21.1% from the year earlier period, which is the smallest rate of increase recorded for contractual adjustments since the four quarter period ended September 30, 1998. By payer group, contractual adjustments were up by 25.4% for Medicare, 26.8% for Medicaid, and 16.4% for other payers over the year ago level. Contractual adjustments for Medicare and Medicaid reflect the difference between billed charges and amounts allowed by these programs. The difference between billed charges and the payment rates negotiated with major health insurers, managed care plans, HMO’s, and other contractual payers are included in contractual adjustments for other payers. During the past twelve months the largest percentage growth in contractual adjustments has been in the Puget Sound and Central Washington regions. Annual rates of increase were above the statewide average for frontier rural hospitals and urban hospitals. Contractual adjustments grew more rapidly in not-for-profit facilities than in either district hospitals or proprietary hospitals.
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Contractual AdjustmentsTwelve Months EndedChangePercent
Sept 30, 2000Sept 30, 2001Change
Statewide Total$4,302,678,906 $5.210,048,017 $907,369,11121.1%
By Payer Group:
Medicare$1,521,449,203$1,907,494,254$386,045,05125.4%
Medicaid $625,209,223 $793,039,472$167,830,24926.8%
Other Payers$2,156,020,480$2,509,514,292$353,493,81216.4%
By Region:
King County$1,910,457,299$2,264,626,676$354,169,37718.5%
Puget Sound$1,039,295,070$1,320,638,974$281,343,90427.1%
Southwest Washington $456,902,578 $541,295,397 $84,392,81918.5%
Central Washington $302,815,875 $396,802,185 $93,986,31031.0%
Eastern Washington $593,208,084 $686,684,785 $93,476,70115.8%
Contractual AdjustmentsTwelve Months EndedChangePercent
Sept 30, 2000Sept 30, 2001Change
By Population Density:
Frontier Rural $14,392,841 $17,810,258 $3,417,417 23.7%
Remote Rural $83,728,007 $97,095,404 $13,367,397 16.0%
Less Remote Rural $397,709,761 $453,725,890 $56,016,129 14.1% Urban $3,806,848,297 $4,641,416,465 $834,568,168 21.9%
By Type of Ownership:
District $474,061,177 $561,150,186 $87,089,00918.4%
Not-for-Profit$3,352,444,929$4,112,667,640$760,222,71122.7%
Proprietary $140,685,331 $159,143,481 $18,458,15013.1%
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Net Patient Service Revenue
Net patient service revenue is defined as the amount of revenue actually realized by hospitals. In the twelve month period ended September 30, 2001 net patient service revenue reached $6.9 billion, which was an increase of $622 million, or 9.9%, over the corresponding period a year ago. This was the largest annual growth rate for net patient service revenue since the four quarter period ended December 31, 1995. Since deductions from revenue did not grow as rapidly as in recent periods, this allowed net patient service revenue to increase at a greater rate. In contrast to earlier periods, there was very little difference in growth rates by payer group.
Operating Expenses
Growing by 9.7%, or $599 million, operating expenses reached $6.8 billion in the twelve month period ended September 30, 2001. This is the largest annual percentage increase in operating expenses since calendar year 1992. Operating expenses are the costs of providing health care services to hospital patients. Since aggregate patient volume, as measured by adjusted discharges, grew by 2.9% over the year ago level, the increase in operating expenses not related to patient volume was 6.6%. This exceeded the 2.6% increase in the overall consumer price index for the same period as well as the annual increase of 6.3% in the hospital services component of the index.
Net Operating Income
During the four quarters ended September 30, 2001 net operating income advanced to $143 million, which was 5.1% over the previous quarter, 42.4% over calendar year 2000, and 19.0% over the year ago level. This was the highest net operating income recorded for an annual period since calendar year 1999. Net operating income per adjusted discharge jumped to $157.66, which was 15.6% greater than the year earlier rate. Although most hospitals in WashingtonState are operated by not-for-profit corporations or governmental entities such as public hospital districts, net operating income is still essential to provide the funding needed for replacement of buildings and equipment as well as the acquisition of modern medical technology.
UTILIZATION INDICATORS
Discharges, Patient Days, and Length of Stay Inpatient activity is measured primarily by discharges and patient days. Discharges from Washington hospitals continued to grow, reaching a total of 513,035 discharges during the four quarter period ended September 30, 2001. This was a gain of 17,878 discharges, or 3.6%, over the corresponding year ago period. During the same interval patient days expanded by 89,107 days, or 4.2%. Since patient days are growing slightly faster than discharges, average length of stay crept upward to 4.31 days for the twelve month period ended September 30, 2001.
Adjusted Discharges
Adjusted discharges continued a steady climb that has endured since the twelve month period ended March 31, 1994. In the four quarter period ended September 30, 2001 adjusted discharges reached 908,555, which was an increase of 25,334, or 2.9%, over the four quarter period ended September 30, 2000. Adjusted discharges are utilized as an aggregate indicator of hospital activity. The calculation of adjusted discharges applies factors representing outpatient activity and skilled nursing activity to inpatient admissions. Since inpatient activity is now growing faster than outpatient activity, adjusted discharges are increasing slower than inpatient discharges.
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OPERATING INDICATORS
Rates per Adjusted Discharge
Rates per adjusted discharge indicate the relationship between financial indicators and aggregate patient service volume. By removing the impact of volume changes, the remaining change between periods can be attributed to inflation, technology changes, and variations in efficiency. Rates per adjusted discharge for the twelve month periods ended September 30, 2000 and September 30, 2001 and the corresponding percentage changes were:
Rates per Adjusted DischargeFYE 9/30/00FYE 9/30/01 % Change
Total Patient Service Revenue per Adjusted Discharge $12,133.54$13,484.56+11.1%
Deductions from Revenue per Adjusted Discharge $5,006.03 $5,871.58+17.3%
Net Patient Service Revenue per Adjusted Discharge $7,127.51 $7,612.98 +6.8%
Total Operating Expense per Adjusted Discharge $6,991.20 $7,455.32 +6.6%
Net Operating Income per Adjusted Discharge $136.31 $157.66+15.7%
Since aggregate volume increased between the fiscal periods ended September 30, 2000 and September 30, 2001, the percentage changes in rates per adjusted discharge are less than the corresponding changes in the financial indicators before volume adjustment.
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FINANCIAL RATIOS
Financial ratios underscore the relationship between selected financial indicators. The financial ratios selected for this report are not all encompassing, but represent financial indicators that can be readily calculated from data available through the quarterly reporting process as currently designed without requesting supplemental data from the reporting hospitals.
Days in Accounts Receivable
Accounts receivable is the largest item in the current assets portion of the balance sheet for most hospitals. Days in accounts receivable is a measure of how “current” this asset is. In this report, days in accounts receivable is calculated on an annual gross basis. On a statewide basis days in accounts receivable averaged 71.8 days for the twelve month period ended September 30, 2001. This was a reduction of 6.7 days, or 8.5% from the corresponding year ago period and was the lowest level experienced since the twelve month period ended December 31, 1995. For payers other than Medicare and Medicaid, average days in accounts receivable dropped to 78.8 days. This was a reduction of 10.2 days, or 11.5%, from the year earlier level and was the lowest level experienced since the twelve month period ended June 30, 1993.
Operating Margin
In past editions of the hospTRENDS report operating margin has been calculated by dividing net operating income by total patient revenue. Utilizing this method, operating margin for the four quarter period ended September 30, 2001 was 1.17%, which was 28% above calendar year 2000 and was equal to the level achieved in the four quarter period ended June 30, 2000. This method is labeled as “Operating Margin – Gross” on the table and graphs in this report.
Based on reader input we are introducing an alternative calculation of operating margin based on dividing net operating income by total operating revenue. Total operating revenue is total patient revenue plus cost recoveries minus deductions from revenue. Utilizing this method, operating margin for the four quarter period ended September 30, 2001 was 1.95%, which was 33% over calendar year 2000 and was the highest recorded since the four quarter period ended March 31, 2000. This method is labeled as “Operating Margin – Net” on the table and graphs in this report.
Readers, please let us know which method of calculating operating margin is more useful for you. Your response may be sent by electronic mail to .
Operating margin measures the ability of hospitals to generate the funds necessary for replacement and expansion as well as the acquisition of new technology.
Deductible Proportion (Including Component Parts)
Total deductions from revenue, contractual adjustments, and charity care are compared to total patient service revenue to arrive at the deductible, total contractual, and charity care proportions. The Medicare contractual, Medicaid contractual, and other contractual proportions compare contractual adjustments for each payer group to total patient service revenue for that payer group. The deductible proportion reached 43.5% and the contractual proportion reached 42.5%, which were new highs, during the four quarter period ended September 30, 2001. The Medicare contractual proportion of 46.7%, the Medicaid contractual proportion of 45.3%, and the other payer contractual proportion of 39.1% were also new highs. After dropping in each four quarter period after the period ended March 31, 1999, charity care turned slightly upward to 1.02% in the four quarter period ended September 30, 2001.
Inpatient and Outpatient Revenue
The proportion of total revenue to inpatient revenue and the outpatient revenue percentage are alternate ways of looking at the relationship between inpatient and outpatient revenue. Between the annual periods ended September 30 30, 2000 and September 30, 2001, the outpatient revenue percentage dropped from 43.1% to 42.8%, while the ratio of total revenue to inpatient revenue slipped from 1.76 to 1.75. This is the third consecutive quarter that these indicators have declined. They are now at the lowest level since calendar year 1999.
Medicare and Medicaid Revenue
The Medicare and Medicaid revenue percentages indicate the proportion of total hospital business that these programs represent. In the four quarter period ended September 30, 2001 the Medicare percentage was 33.3% and the Medicaid percentage was 14.3%. The Medicare percentage reached a low of 32.5% at the end of calendar year 2000 and has started upward during 2001. The current level is the highest since the twelve month period ended September 30, 1998. After declining for the entire time span covered by this series of reports, the Medicaid percentage reached a low of 12.9% in the four quarter period ended September 30, 1999 and has been climbing since that time. The current level is the highest since the twelve month period ended September 30, 1996.
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hospTRENDS
Washington State
Hospital Financial and Utilization Trend Update
Quarter Ended September 30, 2001
For additional information, comments, and suggestions,
or to request extra copies of this report, please contact:
Center for Health Statistics
Hospital and Patient Data Systems
1102 South Quince Street
Post Office Box 47811
Olympia, WA 98504-7811
Telephone: (360) 236-4215
FAX : (360) 664-8579
Internet:
Mary Selecky, Secretary
Department of Health
Joangeles (Jac) Davies, Assistant Secretary
Epidemiology, Health Statistics, and Public Health Laboratories
Teresa Jennings, State Registrar and Director
Center for Health Statistics
Authors: Thomas Muller and Richard Ordos